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The Eagle •

Sunday, March 2, 2014

Life Financial Planning Thank you to the Brazos Valley Chapter, Texas Society of Certified Public Accountants for providing the written content for this special advertising feature in The Eagle.

The benefits of a child - tax benefits, that is

Jodi Jones, CPA The title of this article might conjure up many amazing, yet challenging thoughts and feelings. Before the mind wanders too far, let’s hone in on the word TAX. This article will focus on several tax issues, including deductions, credits and financial planning. As most of you know, welcoming a child into your life grants you an automatic tax deduction. This begins as a set amount that each year is indexed for inflation. In 2013 and 2014, the personal exemption amounts are $3,900 and $3,950, respectively. Returning to tax law in 2013 is the concept that you may not receive the full deduction, depending upon your level of income. If you are married filing jointly, when adjusted gross income (AGI) reaches $300,000, a phase-out will begin to occur, and the deduction completely disappears when AGI reaches $422,500. The limits are different based upon your filing status: Single phase-out range is $250,000 to $372,500 and Head of Household is $275,000 to $397,500. In addition to the

personal exemption, you may be entitled to claim a child tax credit of up to $1,000 per qualifying child. Some of you just noticed the words “may” and “qualifying” in the previous sentence. No article about taxes can state absolute rules but rather general rules with exceptions. Generally, the child tax credit is a nonrefundable credit that is limited to regular tax, plus alternative minimum tax. One exception is that for certain taxpayers, some of the credit may be refundable. Another exception is that beginning at $110,000 AGI, the child tax credit begins to phase out if you are married filing jointly. [Single and Head of Household - $75,000]. The law does keep the definition of a qualifying child similar for the purposes of this credit to a dependent, except for the age limitation of less than 17. If your bundle of joy arrived through the adoption process, certain expenses incurred in the legal adoption of the child may be eligible for an adoption credit and/or you may be able to exclude adoption benefits provided by your employer from income. Factors that may affect the ability to utilize this credit include the age of the child, whether the child is determined to have special needs and your level of income. Qualified adoption expenses include, but are not limited to, adoption fees, attorney’s fees,

court costs and travel expenses. Additional issues often arise with foreign adoptions or unsuccessful adoptions. Always consult your tax advisor to discuss the particulars of your facts and circumstances, so you gain a full understanding of required documentation and benefits available. Many tax items have been addressed thus far that begin upon arrival, but let’s progress with the child’s age and needs. If you incur expenses for the care of your child, thereby enabling you to work, the child and dependent care credit may be available. This includes care expenses for children under the age of 13 or an incapacitated child while you work or perhaps look for work. Like many other credits, this one is nonrefundable and is limited to 20 to 35 percent of qualifying expenses and depends upon your level of income. Eligibility tests, qualifying individual tests, qualifying expenses, maximum expenses allowed per child and family, earned income of taxpayer and spouse, full disclosure of caregiver, address and federal identification number, along with dependent care benefit plans offered through your employer add complexity in determining your ability to claim this credit. With all the expenses that a child brings to the parents’ life, it may

Did you know? According to Age in Place, nearly 60 percent of available senior income is being spent on housing and healthcare, and those expenditures do not include transportation or food. The rising costs of many necessities can make it difficult for seniors to make ends meet and, as a result, certain money-saving measures are often necessary. One idea to save money is to shop for food on a full stomach. It’s a fact that people buy less when they’re full, as they are not prone to impulse buys to squash hunger pangs.

be hard to think about saving. This next topic is from a financial planning angle, and may include other family members, including grandparents. Qualified Tuition Programs, commonly referred to as 529 plans, are tools to either prepay a child’s tuition for a qualified higher education institution or at least contribute to an account used to defray the cost of paying for the child’s education at a qualified higher education institution. Grandparents can use this tool to gift a large upfront amount to their grandchild’s account. No tax deduction is available upon contribution; however, the impact is family asset transfer and the potential for the fund’s earnings to avoid taxation entirely if spent on qualified higher education expenses. As mentioned previously in this article, a taxpayer’s adjusted gross income often comes into play to determine the ability to utilize a tax benefit. This is one area that does not tie into the adjusted gross income. The Internet provides many resources and comparison tools, and if you are interested in learning more, begin your search at www. Another financial planning tool is the ability to teach your child the importance of saving. This can begin early in life and many possibilities and strategies exist. Let’s focus on just one in this

article. As your child begins to have earned income, encourage them to open an IRA account. Depending upon their level of income, the ROTH IRA may be the optimum savings device. A Roth IRA does not provide a deduction as contributions are made (and often children do not need the deduction on their tax return), rather they provide the ability for the earnings to grow and not be subject to taxation, even on the withdrawal of those funds. Tax strategies may involve a parent employing their child in the family business or a grandparent gifting some of the Roth IRA contribution. Do not underestimate the earning potential from numerous years of investment growth during the child’s life. Briefly we need to mention a lesser-known tax referred to as the kiddie tax. In financial planning for families, asset transfer plans are utilized to shift earnings to realize lower effective tax rates. This should be done in consultation with your CPA and financial planner to avoid pitfalls. The kiddie tax is one such pitfall. A child’s unearned income (interest, dividends, capital gains, etc.) may become subject to the parent’s tax rate, and as such, negate benefits of the asset transfer. There are certain investments that do minimize the effect of the kiddie tax, and careful planning is needed.

The last topic this article will cover is qualified higher education deductions and credits. Currently, these include the tuition and fees deduction, the American Opportunity credit and the Lifetime Learning credit. There is a difference between a deduction and credit. A deduction is given above the adjusted gross income line of your return, while the credits reduce the actual tax liability. Careful consideration should be given to determine the best overall result for your situation. The American Opportunity credit is available only on the first four years of your undergraduate degree, while the Lifetime Learning credit is available for undergraduate and graduate studies. Rules and limitations include adjusted gross income, expenses falling under the definition of qualified education expenses and enrollment. This article covered considerable territory, but each concept has several layers to determine the deductibility and best tax minimization planning. Your CPA can help you understand and work with you to develop a plan. Jodi G. Jones is a CPA and tax partner with Seidel, Schroeder & Company in College Station. She can be reached at 979-846-8980 or

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Sunday, March 2, 2014

The Eagle •


Life Financial Planning Thank you to the Brazos Valley Chapter, Texas Society of Certified Public Accountants for providing the written content for this special advertising feature in The Eagle.

Essential tricks for funding both college and retirement

Tracy B. Stewart, CPA, CFP Like the chicken or the egg, many parents want to know what to save for first: their kid’s college or their own retirement. This is actually one of the 20 tough financial questions posed in the “Do This or That?” list in Kiplinger’s Personal Finance magazine. For most people, the answer is to first save for retirement. Savings is the primary way to fund your retirement, but there are a variety of ways to fund your kid’s college. The Wall Street Journal reported that for the 2012 - 13 school year, parents on average paid 27 percent of college tuition from income and savings. The rest came from grants and scholarships (30 percent), student loans (18 percent), student income and savings (11 percent), parent borrowing (9 percent) and relatives and friends (5 percent).

You can make saving for college a priority if you are lucky enough to have extra money coming your way for retirement. Inheritance, beneficiary of a trust, large guaranteed pension benefit – all these are examples of retirement windfalls that may enable you to first save for college. If you are within 20 years of retiring and you have not met your retirement funding goals, you need to plow all the money you can into retirement accounts. If you pass up on socking money away in your 401(k), you are leaving money on the table. You are missing the employer match for free money. Plus, retirees don’t get to fund their living expenses with scholarships, grants or federally guaranteed loans. Our federal financial-aid system disregards tax-sheltered retirement plan money in calculating your kid’s odds for financial aid. The best way to do both Start with studying the rules on college financial aid. We all complain about these rules being excessively burdensome, grueling, highly technical and downright yucky. However, when you understand the way

financial aid qualification is determined, you can create a windfall to pay your kid’s college years. There are two types of college financial aid: based on need and based on merit. The former is based on your family financial situation. The latter is most often based on your kid’s grades and less often based on your kid’s remarkable talent like athletics or music. We are going to focus on need, since I can’t tell you how to groom your child for a basketball scholarship. We first turn to a mathematics equation. The Cost of Attendance at a school, minus your EFC or Expected Family Contribution, equals your need. This equation rewards parents’ savings at varying levels, more in some types of accounts and less in others. The greater the college costs and the smaller the EFC, the better chance your kid has of getting financial aid. This is true whether you are talking about the FAFSA form or the CSS Profile aid application. FAFSA is the Free Application for Federal Student Aid, the most common form to complete. It helps calculate whether your kid qualifies for federal grants and subsidized student loans. About 300 colleges

across the country use the College Board’s College Scholarship Service (CSS) Profile form for determining discounts on tuition. Your qualified retirement and IRS accounts are the key accounts in the equation. These accounts are ignored when you add up your assets and income available for paying those college bills. That leaves your other assets to be included in the mathematics of qualifying for financial aid. Your savings, checking, CDs, money market, mutual funds, stocks, bonds, commodities, ETFs and investment real estate are all counted in the EFC number. However, you need to know which colleges use which formulas. Educate yourself, so you know how your finances will play out in the respective mathematical formulas. Nifty things you can do Save in qualified retirement plans like 401(k)s and 403(b)s. Grab the employer matching contributions. Those don’t count against you in the financial aid equation. If you are a business owner and employer, the company contributions to your account are not

added back into your income in the equation. Fund a Roth IRA because IRAs do not count against you in financial aid calculations. Your Roth IRA contributions do not get added back into your income because they were not a deduction on your tax return. In the worst case, you can eventually pull some money out of your Roth for college costs, but before you do, check with a CPA on the current rules governing taxes and penalties. Get life insurance. Cash values on life insurance policies do not count in the EFC. You can also use that cash for college costs. If the insured person dies before or during your kid’s college years, you can use the life insurance proceeds to pay for college. Maybe own nonqualified annuities. These don’t count on the FAFSA form, but they do count on the CSS Profile form. Thus, there is not a consistent answer on whether to own annuities when it comes to qualifying for financial aid purposes. Invest in a 529 plan. There are two different types of 529 plans: the 529 College Prepaid Plan and the 529 College Savings Plan. The most common is

the College Savings Plan. This is a tax-advantaged account for building up assets to use at any accredited college or vocational school in the country. The 529 Prepaid Plan allows you to buy tuition credits in your home state’s university system at today’s prices. As with all investments, do your research before you buy. You get tax-free growth, and the money isn’t taxed when you take it out for college expenses. When parents own the account, they are included in the mathematical equation. Try to pay off debts before your kid gets to college. When Junior is in college, your cash outgo will rise significantly. With the cost of college increasingly high, you might be tempted to dip into your retirement to fund Junior’s college costs. Beware -- doing this can be very expensive. You risk having to ask your kids for money when you are elderly. If you want a comfortable lifestyle in your retirement years, don’t break the bank paying for the best college. Contact Tracy B. Stewart, CPA, PFS, CFF, CDFA, CFP® through her blog at www.

How CPAs are different from tax preparers and preparing financial statements are additional services CPAs deliver.

Rodney Horrell President, Brazos Valley Chapter TSCPA

Choosing a tax professional The April 15 tax deadline is quickly approaching, leaving taxpayers wondering how to choose the right tax professional to fit their needs. The Brazos Valley Chapter of the Texas Society of Certified Public Accountants encourages the public to be aware of the many differences between CPAs and licensed tax preparers. While both CPAs and tax preparers must register with the IRS, not all tax preparers are CPAs. CPAs are uniquely qualified to offer accurate, practical information about business and personal finance issues, such as financial planning, saving for retirement, estate planning, investment advice, business strategies, diversification, valuation and personnel matters. Audit services, developing and maintaining effective accounting systems

Education and experience One important difference between CPAs and tax preparers is that CPAs must comply with extensive education and experience requirements. CPAs are first required to pass the rigorous Uniform CPA Examination in order to qualify for their licenses. This comprehensive exam tests how much CPAs know about a wide range of technical and business topics. CPAs must also meet annual continuing education requirements to keep them up on new business developments. State boards of accountancy also set their own requirements governing education, ethics and work experience. All in all, the regulations ensure that only highly qualified and knowledgeable individuals are able to call themselves CPAs.   When a CPA prepares your tax return, he or she uses the depth of experience and extensive knowledge that enabled him or her to pass the CPA exam in the first place and to comply with continuing education and experience requirements. CPAs also works with clients all year long, not just during tax season. CPAs spend their time outside of tax season helping clients with a wide range of business

and personal finance issues. Other registered tax preparers may only work with clients during tax season, and may not have a big-picture understanding of the many financial issues that their clients face. Finding the right CPA for you After you’ve made a decision to work with a CPA, you may be unsure of how to find one. You can start by using the search feature on the Texas State Board of Public Accountancy’s website (www.tsbpa. You also can ask friends and co-workers who helps them with their taxes. Ask a lawyer, banker, insurance agent or investment advisor for recommendations. Also check with your local chamber of commerce, civic and church groups. In addition, the Brazos Valley Chapter of the Texas Society of CPAs can connect the public with CPAs (www.bvcpa. org). Interview CPAs and find out how long they’ve been preparing tax returns and how much education they have. Don’t be afraid to ask for the names of clients you can contact. Find out from past clients how satisfied they were with the work performed and whether it was done in a timely manner. Look not only for technical competence but also for interpersonal and communication skills.

1470 Copperfield Parkway • College Station, TX 77845 (979)846-8980 •

Following the aforementioned steps will help you choose a CPA to manage your financial future. Establishing a long-term relationship will allow a CPA to thoroughly learn your business or personal needs, helping them to become a trusted advisor on major financial decisions and transactions.

Rodney Horrell, CPA, graduated in 1998 with a BBA in accounting from Southeast Missouri State University. He works at Texas A&M University, where he is assistant director of Financial Management Services. Professionally, Horrell’s time has been spent in business process consulting, internal auditing and now financial

statement preparation and external reporting. He joined the Brazos Valley Chapter of the Texas Society of Certified Public Accountant’s Board in 2008, where he has serves as president. He has also served as a director on the Board of the Texas Society of Certified Public Accountants since 2010. He can be contacted at

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